Law changes related to the deduction of income tax losses. / What to do with the 2020 losses?

2021-03-02 14:56:13

The year-end reporting time is quickly approaching, which means it is time to take stock for 2020.

Due to the COVID situation, a number of laws have been amended. One of them is the regulation of the deduction of tax losses, enshrined in Law No. 299/2020, which entered into force on 1.7.2020. This option is likely to be used primarily by organizations whose tax liabilities were high in 2018 and 2019, while in 2020 they incurred significant tax losses. This new law affects the business activities results of both legal entities (s.r.o.) and individuals (entrepreneurs – OSVČ).

In the beginning, let us clarify what were possibilities for accounting of annual tax losses prior. If a company suffered a loss based on the results of its annual economic activity, it could have been used over the next five years for reducing the tax base.

With the current changes, the taxpayer has several new options for accounting of tax losses:

1) Recalculation of tax in two fiscal periods immediately preceding the 2020 tax period. In this case, the tax losses deduction is limited to a maximum of 30 million CZK. The practical procedure will be illustrated in the following example:

The taxpayer submits a tax return for the 2020 period. The tax loss of 2 000 000 CZK is calculated in this report. The company’s profit for the 2018 fiscal period was 900 000 CZK (19% income tax = 171 000 CZK), and for the 2019 period was 1 000 000 CZK (19% income tax = 190 000 CZK). Income Tax for previous years has been calculated and paid. After the accountant submits additional reports for 2018 and 2019, income tax over-payment of 361 000 CZK will arise. Therefore, one can apply for an overpaid tax refund, which will be reimbursed to the company’s bank account within the statutory period. The remaining loss of 100 000 CZK can be used in the next tax periods (up to 5 years maximum).

2) Refusal to account for a tax loss in five fiscal periods immediately followed the year when the tax loss has occurred.

In this case, the taxpayer may waive the right to claim the tax loss reimbursement by notifying the tax authorities about this before the deadline of submitting the annual report. The basis for waiving this right is the taxpayer’s desire to limit the period of possible control (audit) by the tax authorities.

When you cannot use the tax losses from previous years:

The annual tax loss cannot be deducted if the taxpayer has experienced a significant change in the structure of the founders. This includes the acquisition or increase in shares of the authorized capital or voting rights; and the acquisition of voting control, which together accounts for more than 25% of the shares capital or voting rights. The major factor in determining the presence of these changes is the founders’ structure comparison for the tax period when the loss was identified to the following reporting period.

The mentioned restriction does not apply if the taxpayer can prove to the Tax Authorities that at least 80% of the turnover (at the time when the changes occurred and during the period for which the tax loss should be applied), was produced by the same type of economic activity.

Utility companies, with the exception of utility companies that are Universities or Health Care providers that are authorized to provide health care services under the Health Care Act, cannot carry out the deduction of tax losses. 

By entrusting to the DoMyTax specialists with providing comprehensive accounting, bookkeeping and tax support for your business needs, you will gain confidence and peace of mind that the maximum possible tax optimization options will be used to reduce your company’s tax liability.

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